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A loss payee is the person or entity that is entitled to payment from an insurer when a policy payout is triggered.
This payee does not need to be the party that is insured.
For example in a life policy, beneficiaries are not the person whose life is insured for in the policy.
In real estate, loss payees are most commonly found with lenders who issue mortgages to borrowers. And the most common reason for policy payouts to occur are from physical damages to property, or even destruction.
This helps banks and financial institutions financing property purchase ensure that they are the first party to be paid when there is a payout from property insurance.
The principal balance would be settled with the funds, and the remainder to the homeowner.
In many cases, lenders make it a requirement for borrowers to name them as a loss payee before granting any mortgage for the purchase of property.